Why don’t we have to worry about market declines? You hear me say this all the time, but do you actually understand it?
There are all sorts of fears brought about by a plunge in your portfolio’s value. It’s only human nature to get upset, I get that. And when I say “not to worry”, you might find the advice a little tone def. Easy for you to say, you think! This is all the $ in the world for me…I can’t afford to lose it!
So let’s unpack this disconnect between my advice and your emotions.
First, I’m sure you often feel like a portfolio decline, no matter how often it happens, is a sign something is wrong or broken with the world, the economy, and your investments. Not true. No sports team wins by leading every minute of every game. Every team faces deficits and adversity, the winner is often the team that best overcomes the setbacks. It’s the same with the economy and your portfolio. Companies aren’t perfect nor is the economic environment always condusive, businesses don’t always have record profits every quarter. Their stock prices ebb and flow around a rising long-term trend line, they don’t go straight up. It’s this volatility that buys you the chance to earn a high return—about +10% /yr over the last century on an all-stock portfolio.
Next, we don’t view lower prices in investing the way we do anywhere else. Imagine you’re buying a car, and the price you’ve agreed upon with the salesman is adjusted higher in the final moments of the negotiation. Are you now more likely to buy the vehicle? What if you’re on the fence about the purchase, and the salesman agrees to knock 10% off the price? A much better deal, right? Why don’t you think about stock prices the same way? Ok, maybe you don’t have $ to buy at these lower prices. In that case they’re low to entice someone else to jump in, despite the greater uncertainty. But if you’re not buying at these prices, you’re probably not selling either. So they’re not your prices. Why do you care what they are at this very moment?
Finally, even if we get all this, we worry that stock prices and our portfolio value will still be lower when we eventually need the money. But this too is likely a mistake. If you own a diversified asset class portfolio, the likelihood your portfolio will go to zero, or even go way down AND stay down, is unlikely. Diversification acts like a bungee cord. Your portfolio is never in free fall, it declines, and the lower it goes, the higher the future expected returns and bounce back should be. I quantified this in my previous article. The highest returns we ever earn from investing don’t come in random spurts, they come immediately after the worst declines. One step back, then two steps forward. Don’t believe me? Just look at the visual of annual and periodic returns on the U.S. stock market chart below.
It's showing, from bottom left to upper right, the last century of annual returns from owning stocks. Most years are green (positive), some are red (negative). The darker the shade, the higher/lower the result. But as you move up the chart at any point from bottom to top, you see the result from holding stocks over any multi-year period. Notice how quickly the red cells disappear? Look specifically at the upward-sloping diagonal white lines; that corridor represents all 10 to 15 year holding periods starting in any year since 1928. Almost always a positive experience. That's my point—investing works if you give it the time it needs. It’s going to go down and as you can see there’s no pattern to the individual years; most are positive (75%), far fewer (25%) are negative.
Admittedly, this is a lot, and there are more points I could have made. But if you’re the typical Servo client with a job, or enjoying retirement, with a family and a life, you don’t need a dissertation on portfolio management, I always hear that the executive summary will suffice.
When the market and your portfolio goes down, you don’t have to worry. You’ll be ok. Your patience will be rewarded.
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RISKS
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.